Why the oil companies lost solar

Energy Policy 60 (2013) 52–60

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Why the oil companies lost solar Damian Miller Orb Energy Pvt. Ltd., 12 Srigandhada Kavalu, Sunkadakatte, Magadi Road, Bangalore, 560091, India

H I G H L I G H T S

   

This paper examines why BP and Shell were not successful in solar, and exited. It finds innovation theory to be very helpful in answering the question. The evidence from semi-structured interviews, press reports, and archival documentation is in line with innovation theory. Both the theory and the findings offer a different way forward for future oil and gas entrants.

art ic l e i nf o

a b s t r a c t

Article history: Received 29 November 2012 Accepted 14 May 2013 Available online 10 June 2013

Solar energy is a growing source of electricity supply. Oil companies including BP and Shell recognized this early on and entered the solar industry when it was still in its relative infancy. These companies invested heavily in vertically integrated solar companies that were at one point among the largest in the world. But neither BP nor Shell was successful, and they both decided to exit the solar market. This stands as a paradox since such companies have the funds, the long-term perspectives, the management systems, the multinational presence and the lobbying clout to potentially succeed in this new energy industry. Why were they not successful, and why did they ultimately exit? This paper uses innovation theory to explore the reasons why large incumbent corporations typically fail to succeed in commercializing disruptive innovations at scale. Evidence from semi-structured interviews and discussions with former employees of BP Solar and Shell Solar confirm the explanatory power of key constructs from innovation theory in accounting for the big oil companies' experience with solar technology. Ultimately, the findings suggest that oil companies would have done better to treat their solar businesses as separate stand-alone entities. & 2013 Elsevier Ltd. All rights reserved.

Keywords: Solar energy Oil Multinational corporations

1. Introduction At the end of 2011, BP became the second of today's large oil companies to exit the solar industry. Before BP, it was Shell that bowed-out fully in 2009. There are some oil companies still in the industry, including Total with its more recent acquisition of a majority stake in SunPower in the United States, and Chevron, which concentrates mainly on the installation of medium-sized solar power plants. But of the oil majors, BP and Shell were the most fully invested, creating vertically integrated solar companies that at one point were the 2nd and the 4th largest solar companies in the world. They both saw this as part of their diversified energy strategy, and a long-term investment in a renewable energy future. But both BP Solar and Shell Solar soon lost their positions at the top, overtaken by entrepreneurial start-up companies that raised venture funds, grew quickly to scale, went public to raise further funds, and shot past the incumbent giants. Given these oil

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companies' deep pockets, powerful brands, lobbying clout, longterm perspectives, and stated desire to diversify energy sources, why is it that they were not able to become, and remain, leaders in the solar industry? This question is addressed by applying innovation theory to evidence drawn from interviews and discussions with former employees from BP Solar and Shell Solar.

2. The growth of the solar photovoltaic industry For our purposes, solar technology refers to solar photovoltaic panels and systems that produce electric power. Solar started as an off-grid product, primarily used in space in the 1950s, and in remote areas of the developed and developing world (Miller, 2009). It only started to move on-grid in volume in the mid to late 1990s, thanks to the Japanese and subsequently German government's initiatives to support this sector (Bradford, 2006; Geller, 2003).1 1 The late politician and author, Hermann Scheer, played a pivotal role in this transformational policy. For more on this, please see Miller, Damian. “Power from On High”, International Herald Tribune, November 23, 2010.

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The German government created the special feed-in tariff for solar and other renewables).2 This made it possible for any southfacing roof on a home or building to become a micro-power plant. And in addition, large-scale, ground-mounted power plants started to spring up. Many governments subsequently copied this model, or alternatively as in the US, relied more on tax credits, and the solar industry boomed Fig. 1. As a result of these incentives demand surged, and supply eventually outpaced demand, with a consequent collapse in prices. Five years ago, the average selling price (ASP) of a solar module was $3.5 USD per watt on a wholesale basis. As of the first quarter of 2012 it was reported at $1.09 USD per watt (Navigant, 2012). Mid-way through 2012, ASP's reached $0.84 USD per watt (Herron, 2012), and as of the start of 2013, solar modules are sold for approximately $0.60 US cents per watt on a wholesale basis (Mehta, 2013). The solar industry over the last decade has become a fast-paced industry, where companies must relentlessly focus on scale, and volume to survive and win at lower and lower price points. This is the environment in which the oil companies eventually found themselves. To investigate their experience, documentary evidence was obtained from company reports, press releases and industry archives. No attempt is made here to provide an exhaustive history of oil company involvement in solar energy.3 Rather, the focal case studies are on BP and Shell, who were the biggest, and most recent to exit.

3. The case studies 3.1. BP Solar BP was one of the early entrants to the solar industry, establishing its solar division in 1981. In the late nineties, BP's move into solar energy was accelerated by the merger with Amoco, which gave it a 50% stake in Solarex; then one of the largest solar manufacturers. In 1999, BP acquired the remaining 50% of Solarex from Enron and was thrust into the top tier in the solar industry (BP, 1999). By 2002, BP Solar was the number two solar company in the world, just behind Sharp, the Japanese company, and would go on to have plants in India (through a joint venture with Tata), Europe, China, Australia, and the US. When Lord Brown renamed BP “Beyond Petroleum”, he could plausibly take comfort in the company's dominance in the solar sector. But by the end of 2011, BP exited solar. Even before then – over a three-year period – BP Solar had started a process of gradually closing its plants, and making its 1750 workers redundant. Explaining its exit, BP said simply that it could not “make any money” from solar. Specifically BP sought to cast the blame on the plunging world-wide prices of solar panels, pointing specifically to low-cost competition from China, and on the fact that solar is a “commoditized” business in which they saw little future (Macalister, 2011).4 Instead of solar, BP continued to provide on-shore wind energy (though only in the USA) and biofuels worldwide. In mid-2010, BP paid nearly $100 mln USD for the cellulosic biofuel business of a listed US company (Verenium). Then in March 2011, BP put 2 The first country in Europe to institute feed-in-tariffs was actually Denmark, but Germany was the first where solar benefited at scale (Bradford, 2006). 3 Although that would make for an interesting research project in the field of economic history. 4 The latter explanation is of course a bit ironic, since BP's prime business is oil, and oil is very much a ‘commodity’, and a ‘commoditized business’.

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$680 mln into buying 83% of CNAA, a Brazilian ethanol producer, which more than tripled BP's biofuel production capacity to 1.4 billion litres (or 9 million barrels) per year (Blankenhorn, 2011). A similar development was to play out in the case of Shell, which also found biofuels to be more congruent than solar energy with their oil business. 3.2. Shell Solar Shell started small in the eighties with an investment in a separate solar company called R&S Solar based in Holland. But once Shell took a decision in 1997 to make ‘Renewables’ the 5th core division of Shell, and invest $500 mln USD over 5 years, R&S was absorbed and renamed as Shell Solar. Shell wanted to scale up rapidly in solar energy. To this end, Shell entered a joint venture with Siemens Solar and a German utility in December 2000, and by January 2002, Shell had bought out both of these partners. The integration of Shell Solar and Siemens Solar at this time created a vertically integrated company from silicon production all the way to downstream sales of solar systems, with R&D and 60 MW worth of manufacturing facilities and 1100 people. It was a serious commitment by Shell to make this work. As the CEO of Shell Solar said at the time: “Solar PV is one of the fastest-growing of all the technologies in a rapidly developing part of the global energy market. Shell has a strategic commitment to making renewable energy a commercial reality, and this move is a key step in building a strong, global solar business” (Go Solar (2002)). With this acquisition, Shell catapulted itself into 4th position on the list of the world's cell and solar panel manufacturers, behind Sharp, BP Solar, and Kyocera—in descending order of size (Schmela, 2002). But by 2006, Shell Solar was in trouble. The market for solar was taking off under the feed-in tariff regime in Germany and other parts of Europe, and with it came a tight squeeze on silicon supplies (the raw material in solar panels). As a former Shell Solar executive recalls about this time: “Shell Solar did not have the courage to take up the poly-Si [silicon] producers' offers to secure supply [of silicon], by investing in their [silicon producer's] capacity expansion. Hence producers cut Shell Solar off.”5 Without adequate silicon supply, Shell's factories in the US, for example, were estimated to have a capacity utilization of only 50% (Le Pedus, 2006). And shortly following the silicon squeeze, Shell exited in 2006 by divesting Shell Solar to Solar World from Germany—a relative recent solar start-up (Temple, 2006; Kusjanto and Palmen, 2006). By March 2009, Shell was beating a retreat not just from its residual technology investments in solar, but other forms of renewable energy. The then head of Gas and Power and Renewables explained that Shell was not planning any more large investments in wind and solar which continued “to struggle to compete with other investment opportunities we have in our portfolio” (Bergin, 2009). Shell had retained a 50% stake in an R&D venture with Saint-Gobain to make lower cost solar panels using former Shell Solar's thin-film technology. But by August 2009, Shell had exited this as well. Instead, Shell was clear: the “focus going forward is on biofuels in the renewables sphere” (Gismatullin, 2009). 5 Interview with former senior sales manager and managing director of a Shell Solar group company, 24th May, 2012.

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Fig. 1. Annual Solar Module Sales and Average Selling Prices per Wp, Mints (2012).

By 2009, it was estimated that Shell had invested $1.25 billion in renewable/green energy, including wind, solar and hydrogen, between 1999 and 2006 (Bergin, 2009), and had heavily advertised its presence in this space. Forced to explain how Shell could now back away from such a public position in renewable energy, Shell's CEO explained that Shell was still committed to spending 25% of its R&D budget on renewables, but that the company had “narrowed the options somewhat” (Fehrenbacher, 2010). Specifically, Shell announced a $12 billion joint venture with a Brazilian sugar producer and ethanol developer – Cosan – to create alternative transport fuels. As the Shell CEO explained, Shell was choosing to focus on “…alternative energy that is close to its current business, like biofuels.” And as for solar, he stated that Shell decided to leave solar to the smaller and medium scaled companies, as “we don't see this being something we can scale” (Fehrenbacher, 2010). Thus both BP and Shell ended up taking a similar course, first investing heavily in solar, at one time leading the industry, but then exiting solar to concentrate on biofuels. What explains the inability of these oil and gas companies to succeed in the solar industry and sustain their solar activities?

4. Dispelling the easy answers 4.1. It is a conspiracy Could it be that oil companies entered the solar industry just to try to slow it down? After all, firms have entered markets only to turn around and try to kill the products that threaten their established business. The case of GM and the electric car is a well-known example, where GM actually ended up reclaiming and crushing their EV-1 cars, despite the relative success of this car with customers (Taylor, 2005). But, the case of solar and oil is different. First, if the aim was to hold back solar technology it made more sense to use other means – such as lobbying against supportive policies for these new technologies – rather than trying to become a world-leading solar company. Secondly, if the aim was to try to control solar technology, so as to effectively slow it down, or kill it, it is too late for that. The solar genie is out of the bottle. Viable technology exists today for electricity from solar, many players own and have access to that technology, and there is a market willing to buy it whether the oil companies manufacture and sell it or not.

As we shall see, there was a palpable ambivalence within BP and Shell about what they were doing in the solar industry, but this was not equivalent to entering the industry in order to hold it back.

4.2. It was just PR Some believe that the oil companies were in solar purely for the public relations benefits—to put a better shine on their company and distract customers and stakeholders from the less savory aspects of their core business. For example, here is a response to an article that praised Chevron for moving into alternative energy: “All those recent ads by oil companies are just tokens, they could be doing a lot more and [could] have been doing it sooner – these ads are somewhat like the cigarette company ads telling people they shouldn't smoke…. You will see that it is all smoke and mirrors, just to get their name on the air, not to actually do what they could…. Americans are fools to believe the hype that the oil companies…are developing alternatives.”6 There does appear to have been a PR element to oil companies’ investments in solar. For example, Shell decided to make “Renewables” the 5th core group of Companies (within the Royal Dutch Shell group of companies) and committed to investing $500 million (with a later follow-on investment of another $500 million), following the negative press surrounding the execution of the Ogoni leader Ken Saro-Wiwa in Nigeria, and the customer boycott caused by the proposal to sink the Brent Spar platform at sea. But while PR might have been part of the motivation, Shell can also point to its own internal energy scenarios. One of Shell's scenarios at the time, called the “fifty–fifty vision”, saw renewable energy making up more than 50% of the world's energy mix by 2050 (Langcake, 1999). As a company with a reputation for longterm planning, it was perfectly consistent for Shell to invest heavily in renewables like solar, regardless of the PR benefits. Moreover, Shell and BP built fully integrated solar companies, from manufacturing of silicon ingots, to production of solar cells, to installation of large-scale solar power plants, and the development of global distribution and supply chains. If the aim was just PR, then Chevron's strategy might be more to the point: do select 6 In response to a posting entitled “Oil Companies Promote Alternative Energy”. In Alternative Energy News, October 24th, 2007.

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medium-sized solar power plants, without getting into manufacturing, and use these installations for advertising purposes. BP Solar and Shell Solar do not represent efforts to put a toe in timidly by doing some pilots, getting some good PR and getting out. Instead BP and Shell both invested heavily in solar, tried hard, for a while succeeded or partially succeeded, but in the end failed, and exited. The question remains ‘why?’

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But an oil company is handicapped from the start. It's the end of them.”7 It is odd to think of an oil company as ‘handicapped’ given their enormous resources. But theoretical considerations as well as the evidence reviewed here suggest this was the case.

5. Innovation theory 4.3. It is not in their DNA This is the idea that manufacturing and selling solar panels is totally different to an oil company's existing core business, and thus the latter never had a chance of doing it effectively. It is easy to jump to this conclusion when Shell and BP themselves conclude that concentrating on bio-fuels is a better fit for them. But first, saying it was not in the oil companies’ DNA does not help us understand precisely why capable people within wellresourced corporations could not make solar a success. Second, this simplification may simply not be correct. Some companies have successfully innovated in areas completely outside of their existing core competence. For example, Nokia started in 1871 as a pulp, paper, and rubber by-products company (even making wellington boots) before they started to diversify into telecommunications in 1963 (Nokia, 2013). It would have been hard to argue that mobile telephony was actually in Nokia's DNA at this time of transition.

4.4. Solar technology is hard to do Another potential answer is that the solar industry is a structurally difficult one in which to become profitable; following this logic BP and Shell may have been smart to exit when they did. In some ways this is true. As we have seen, the price of solar has been on a general downward trajectory and the market does not yet exist at its present size without some degree of government support. To survive as a company in this environment requires the relentless pursuit of scale and cost efficiencies; it requires taking and managing risks—among which are the vagaries of government policy. Furthermore the oil companies did not have an empty goal to shoot at. This has been a crowded industry, now in the process of consolidation. Many companies have gone bankrupt and (or) exited the industry. A recent assessment estimated that by the end of 2012 there were fewer than 150 global solar module and cell companies, down from 750 in 2010 (StockCall, 2013). But if the solar industry is hard, is not that exactly where oil companies have an advantage? They have deep pockets and longterm resources to weather the difficult times. There is no question that solar will one day command a large share of the world's energy supply. The last CEO of Shell Solar remarked: “According to the Shell energy scenarios, in 50 years the sun will cover around 20 percent of energy demand” (Schmela, 2005). Among the possible participants, the big oil companies would appear in many ways to be those best suited to succeed in a hard industry like solar. Perversely, despite their strengths, it would seem that the oil companies were actually at a disadvantage in the solar race. As a former Shell Solar executive puts it: “Doing solar is challenging for anybody, but it's even harder if you are an oil company. It's not an absolute ‘can't’; it's more like there are just big hurdles. In a competitive market like solar, you just need to be 1% better than the rest to win every race.

A number of theorists have sought to explain barriers to innovation by large incumbent corporations.8 An incumbent corporation is one already serving mainstream customers in a given sector, as BP and Shell are incumbent corporations in the energy sector. Such incumbent corporations often struggle when faced with a disruptive innovation. A disruptive innovation differs from a sustaining innovation. The latter promises to improve the performance of established products in a way that existing mainstream customers would value. For example, higher-performing petrol is a sustaining innovation. By contrast a disruptive innovation “brings to market a very different value proposition than had previously been available” (Christensen, 1997). Solar photovoltaic technology is an example of a disruptive innovation.9 Large, incumbent corporations often fail in commercializing disruptive innovation. For example, tracing the history of lighting technology from whale oil, to gas, to grid electricity and the incandescent light bulb, to compact fluorescent lights, a historian of technology concludes that: “each wave of lighting innovation has been originated and carried forward by industry outsiders” (Utterback, 1994). What accounts for this relatively poor showing of incumbent corporations? We have to start with the nature of disruptive innovation. Such innovations initially deliver performance that is inferior to that used and expected by the company's mainstream customers. For example, solar has historically delivered electricity at a higher cost than fossil fuels, and is an intermittent resource, thereby requiring additional storage technology; fossil fuels by contrast have built-in storage. Furthermore, disruptive innovations typically have lower profit margins than existing products sold to mainstream customers. Mindful of the requirements of their mainstream customers, and seeking to safeguard and grow profits, incumbent corporations generally tend not to prioritize disruptive innovations (Christensen, 1997). But assuming an incumbent corporation does prioritize such investment, perhaps recognizing that their existing product has finite market prospects, what then are the barriers? First, there is the challenge of finding people capable of managing the innovation. According to Christensen (1997) this is not the big issue— many people in large corporations are flexible enough to be trained in the skills required for an innovation. Other theorists like Penrose (1995), however, put more emphasis on the prior experience of people within a firm, and their unique (and sometimes limited) capabilities. For Christensen (1997), the more important issue is the barriers imposed by a corporation's “values and processes”. While human resource capabilities are deemed to be flexible—e.g. staff can be trained—existing corporate values and processes may be highly 7 Interview with former Senior Marketing Executive at Shell Solar, 7th September 2011. 8 This paper finds the work of Christensen (1997) to be particularly relevant. 9 On the face of it, solar may not seem like a disruptive innovation for oil companies. After all, oil mainly flows to the transportation sector, as well as industrial, and chemicals. Nonetheless, solar does have the potential to disrupt the transportation sector in combination with electric vehicles, and in the power sector in reducing the use of natural gas, in which oil companies are also highly invested.

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inflexible. Others validate this view: “an organizational bureaucracy” inevitably forms over time in large corporations which “…aims to protect a firm's established resource base and existing revenue streams, reputation and market position” (Garnsey and Mohr, 2011). In such corporations, employees often take on the role of stewards of a firm's resource base (Stevenson and Jarillo, 1990). The point is that such employees will struggle if called to take action that is inconsistent with corporate values and processes, even if this is called for by the disruptive innovation in question. Incumbent corporations will also face the barrier of cost structures. There is an inevitable mismatch between the initial low profit margins of a disruptive innovation, and the existing cost base of incumbents (costs that are facilitated by selling higher margin products to mainstream customers). Moreover, shareholders demand growth, and disruptive innovations, that initially serve only niche customers, cannot immediately contribute to a corporation's need in this regard. Worse, the innovation's potential market size may not be measurable, nor even known. In the face of high cost structures, the needs for share price growth from a high base, and uncertainty surrounding the future potential of a disruptive innovation, an incumbent corporation will struggle to allocate resources effectively, and will always be tempted to focus on high margin products they know (Christensen, 1997). By contrast, ‘industry outsiders’ are better able to execute on the opportunity created by disruptive innovation. Industry outsiders that have successfully propagated disruptive innovation often appear in the form of an entrepreneur (Schumpeter, 1928). The examples are numerous: Edison and Incandescent lighting (Hughes, 1979); Henry T Ford and the motorcar (Drucker, 1985); Remington and the typewriter (Utterback, 1994); Jobs and Wozniak and the personal computer (Hartley, 1990). But industry outsiders can also be large corporations. For example, it was not the incumbent fixed-line telephone companies that led innovation in mobile networks and handsets. It was relatively ‘outsider’ companies such as Nokia and Ericsson (Adner, 2012). Returning to the question at hand, we can examine the applicability of innovation theory in the case of oil and solar. As explained above, to test the theory evidence was obtained from a case study research design (Yin, 1994). The research methodology uses both documentary and archival evidence and semi-structured interviews and discussions with former staff members in BP Solar and Shell Solar.10 6. Findings From interviews and discussions with former executives of BP and Shell, a set of factors can be identified as to why oil companies struggled to do solar effectively. These are discussed below and illustrated from interview evidence.

 The culture was not suited to solar—it was too slow-moving and risk averse.

 The people were not suited—they did not have experience in solar.

 The costs were too high for solar.  There was a shorter-term focus on profits from oil and gas.  There was a confusion of objectives—‘are we doing it for the PR?’

6.1. The culture was not suited to solar Solar moved fast in the last decade—technology evolved and companies scaled rapidly. Related to this, former staff at BP Solar

and Shell Solar found that the culture was incompatible, as it was both slow moving, and risk-averse. Being slow is a concomitant of being large and profitable, with shareholder's expectations of dividends and public intolerance for mistakes both running high. To control a sprawling mass of people, hardware, and investments around the world, and ensure things do not go wrong, oil companies must inevitably set standards and procedures, and adopt slow, deliberative decision-making. This reminds us of Christensen's core finding that: “the very processes and values that constitute an organization's capabilities in one context, define its disabilities in another context” (Christensen, 1997). The same values and processes that made BP and Shell strong in oil and gas made them weak when it came to solar. As a former Shell Solar executive recalls: “In the oil market, the prices are going up and down in cycles. The solar price is just going one way – it's going down. That changes everything about the mentality of entering the solar market. It's about the speed of the decision-making. Oil companies invest in plants that should work for 30 years, whereas an investment in a solar manufacturing plant can be uncompetitive in 5 years. That kills the enthusiasm of oil companies once they are in it. It is the unknown unknowns hitting them in the face.”11 A former BP Solar executive made almost the same point: “Oil has been around for 100 years, and the market for it has changed slowly. Solar has changed at 4 to 5 times the speed of oil. You need decision makers ‘wired’ for that kind of learning. Oil company executives are just not comfortable with this pace. Mentally what is needed for solar is more akin to the IT/technology space, where pace is a fact of life.”12 As regards risk-aversion, oil companies certainly take risks. But they take risks in areas that they know well (oil and gas), that have the potential to generate larger, more immediate gains, and which allow for a certain slow, methodical decision making. But, in solar, risks arose that people inside the companies did not fully understand, which offered only long-term, uncertain gains, and which mandated relatively quick decision-making. Given that solar technology is completely different from oil and gas technology, a very inhospitable culture for solar prevails: “A long history in companies such as Shell of doing mega oil and gas projects also creates a culture where people are less comfortable and indeed excited by relatively low tech ‘projects’ such as solar”.13 A good example of how these cultural impediments played out was the case of Shell Solar, and the polysilicon shortage situation facing the industry in 2006 (Lewis, 2006). When confronted with this shortage, many of the now biggest solar companies in the world moved fast, and took risks to secure silicon feedstock for the next ten years. They did whatever it took—they put down big deposits with suppliers, and paid in advance for 10 years. Shell, when faced with the need to take the same risks, declined to accept suppliers’ terms and was soon forced to exit due to lack of silicon. Despite the loss of investment, and impact on reputation, exiting was more suited to the culture than risking further investment for uncertain future gain. 11

See footnote 7. Interview with former Strategy Analyst BP Alternative Energy, 23rd May 2011. 13 Interview with former Senior Manager responsible for Corporate Social Responsibility at Shell, 23rd December 2011. 12

10 The author had relatively more access to Shell than BP, but the findings from interviews with BP Solar were consistent with those from Shell Solar.

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6.2. The people were not suited to solar The issue of people relates to culture, but it is more specific in focusing on the prior experience that people brought to the solar business. As a former executive of BP Solar reflects: “Renewable energy needs people with different backgrounds. There were some talented people in the renewable energy division of BP, but overall… renewable energy did not get the best talent.”14 Using the example of a pipeline, the same former BP executive concludes: “The people running the renewable energy department in oil companies were people used to running a pipeline. It's the complete opposite to what renewable energy needs. Running a pipeline is now relatively simple.”15 Here the findings diverge from the propositions put forward by Christensen (1997) and are more consistent with resource-based view of the firm, originating with Penrose (1995) where the prior experiences, learning, and skill-sets of the people involved are seen to be important. A former Shell Solar executive is clear that the lack of specialist knowledge in the staff, together with the fundamentally ‘new’ nature of solar for Shell staff mainly used to oil and gas, was a key contributor to failure: “Because [Shell] is not an expert in this totally different industry [solar], senior people had no experience in this space. Shell Solar took people from the oil industry, who had different experience, different backgrounds. Making the leap from oil to solar is both a different technology, and a different market… That married with the decision to put existing people in, contributed to its undoing.”16 Another former executive of Shell Solar confirms this view: “Shell (and possibly BP) kept mistakenly assuming that they were in the ‘energy business’ and therefore destined to succeed in every segment of energy. But Big Oil is [sic] no more in the “energy business” than the US railway companies were in the ‘transportation business’ (and hence never recognized the threat of the motor car until it was too late). They are specialised in the oil business and that's it. They have geologists to tell engineers where to drill, and they have chemical engineers and chemists to process the oil into fuels and petrochemicals. Electricity generation and distribution is a completely different game, requiring very different skills, and so is manufacturing solar modules.” So there is a strong view that both BP Solar and Shell Solar made the mistake of putting oil and gas people into their solar companies; that both would have been better hiring outside specialists. Here the points made by Christensen (1997) on values and processes are applicable again, since the corporate values and processes were not conducive to bringing in and retaining such outside specialists. The values and processes interfered in two ways. First, both companies strive to give their high potential employees as wellrounded experience as possible by moving them every two to three years. But this was not felt to be in the interests of solar: “They [the oil companies] also believed too much in rotating high-fliers to ‘new challenges’ every two to three years. So even if by chance they put in a top exec suited to the PV industry,

he/she would never stay long enough to see strategies through. There was too little continuity at the top of Shell's and BP's solar businesses.”17 Secondly, oil companies like BP and Shell are used to having generalists in senior positions. Specialists operate lower in the hierarchy—e.g. on the rig, in the refinery, in the R&D lab. In part this relates to the risk-averse culture—the companies want teams at the top who understand the bigger picture of operating within an oil company. There have been efforts to place more ‘specialists’ in senior positions, but these did not work out well: “Shell International in the early 2000s brought in consumer marketing and brand specialists from outside. Many of them didn't stay very long—the culture did not give them the space to do what they needed to do.”18

6.3. The costs were too high for solar As discussed earlier, BP and Shell were quite candid about the fact that they could not make money in solar, and in consequence decided to exit (Pearce 2009; Macalister, 2011). As BP's CEO recently confirmed: “We have thrown in the towel on solar…Not that solar energy isn't a viable energy source, but we worked at it for 35 years, and we really never made money.” (Brady, 2013) Specifically, when exiting BP pointed to declining PV module prices, Chinese competition, and the ‘commoditized nature of the product’ (Macalister, 2011). But there is a case to be made that the problem was not the technology, nor the price fall, nor the Chinese, but instead concerned the mismatch between the slim profit margins of solar (and most disruptive innovations at the outset), and the prevailing cost structure of BP and Shell (and most incumbent corporations). As Christensen (1997) warned, “It is very difficult for a company whose cost structure is tailored to compete in high-end markets to be profitable in low-end markets as well.” Fundamentally selling oil and gas is a highly lucrative business, and allows for higher costs—in terms of salaries and policies. People in oil companies are used to having munificent resources for their business and permission to spend them. As a former BP Solar executive recalled: “The cost structure of oil companies is just not suited. For example, in BP if you are traveling more than 4 hours you fly business class. I'm sure that's not the policy at Suntech.”19 This of course relates back to the fact that neither the values nor the processes in oil companies were suited to the low-cost requirements of solar. But as another Shell Solar executive notes, it also relates to the prior experience of the people in charge. Those not experienced in solar may not even know how to get there: “There was evidence that our costs were too high, but they kept being fudged…Someone from the solar industry would have cut straight through it…The senior management simply did not have the expertise in terms of how to get to lower cost manufacturing.”20 When Solar World acquired Shell Solar's business, they were said to be amazed at the higher costs, and promptly slashed overall 17

See footnote 5. See footnote 16. 19 Suntech was the largest solar manufacturer in the world in 2011, based in China. 20 See footnote 7. 18

14 15 16

See footnote 12. See footnote 12. Interview with former Marketing Executive at Shell Solar, 7th September 2012.

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costs by 25% at the US factory.21 Solar needs to work at a different cost structure to survive—and this was not something suited to the values, processes or people in the oil companies. 6.4. Shorter-term focus on oil and gas The oil companies recognized that solar would be big one day. A recent scenario by Shell estimates that solar will be the main energy source by 2070, whereas oil demand will peak in 2040 and then fall (Gismatullin, 2013). But as Christensen found, it can be “… very difficult for large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday.” (Christensen, 1997) Evidence of conflicts within BP when it came to resource allocation to solar is entirely in line with this theory: “BP couldn't make it [solar] profitable. They couldn't keep pace with the industry, and didn't like the capital allocation required. When oil is $100 per barrel, the board wants to stay focused on what they do to maximize earnings. When oil prices are low, the board does not want to allocate resources to renewable energy. These conflicts make it hard to keep pace in the solar space.”22 In terms of what was driving this shorter-term focus on the core business of oil and gas versus solar, one Shell executive puts it down to shareholder expectations: “The investment community still invest in oil and gas companies because of their history in successfully delivering on high risk, high return projects. Wind, geothermal, and…solar do not fall into this category…As such there is limited incentive from investors who ‘drive’ share price, which drives company value. Rather, they [oil companies] stick to what they're good at…”23 Related to this is the perverse relationship between size of the corporation and resources allocated to disruptive innovations. Shell's revenue in 2011 was the largest of any corporation in the world at $484 million USD (Du Bois, 2012). When executives face the pressure for growth from such a high base – for example, just 1% growth in revenue from 2011 to 2012 would have meant $4.8 billion USD for Shell – a disruptive innovation like solar cannot help them. Since this technology cannot meaningfully help in the quest for growth, its supporters struggle to show its relevance in the organization. 6.5. Confusion of objectives: “are we in it just for the PR?” The oil companies in question maximized the PR (public relations) benefits of their investments in solar and renewables (Pearce, 2009). BP publicly re-branded itself ‘Beyond Petroleum’. Shell ran television commercials and print ads promoting its renewable energy and clean energy investments. But as we have seen, PR was not the only consideration for BP and Shell. As a former BP Solar executive reflects: “It's hard to be speculative…was the Board really sending people on a fool's errand? There are cheaper ways to get the PR benefits. I don't think it was a factor when considering their staying power.”24 But though there were cheaper and less complex ways for the oil companies to improve their PR than investing in solar, the fact

that there was a PR element created confusion around the objectives. As a former Shell Solar executive explains: “It was more about putting a toe in the water to ‘see’; to learn about it [solar] and keep in touch. But they did not want to lose money. The ambition was not to be the biggest in the world. All that mattered was being big enough to matter. That was driven by ‘reputation’.”25 We saw that in 2006 when Shell was facing a silicon shortage in the market, the only way to stay competitive was to make a big capital investment to secure silicon supplies, and rapidly scale its manufacturing capacity to keep up with the growth of rivals. But if PR is a central objective, then the risks of such action become intolerable; the PR benefits are quickly outweighed by perceptions of potential costs, and exiting becomes the more viable option. As the same Shell Solar executive concluded: “In Shell it was always unclear what we were trying to do.”26

7. A way forward? Given the experience of BP and Shell in solar it would be easy to conclude that oil and solar may never mix. As one former Shell executive put it: “Maybe Exxon got it right. Maybe it's not the oil company's job to do solar. If the day comes when the world doesn't need more oil, it may be the oil company's job is to simply switch off the lights and return the money to its shareholders”.27 This is the DNA argument, to the effect that oil companies will never be able to succeed in solar and should stay focused on their core business even as it declines. Another approach put forward by a former Shell executive was: “stick to what they are good at for now, and then later invest in a big solar company…” 28 A former Shell Solar executive shared this view: “At the time, Big Oil was simply way too big and bureaucratic to be of any use in the nimble, fast growth PV sector. Big Oil could not help but stifle a PV company…It is possible that after PV companies reach several billion dollars in revenue and their growth slows down, they will benefit from the management structures and operating procedures of Big Oil.”29 But when considering such recommendations, we should reflect on the findings of Christensen (1997): “waiting until new markets are ‘large enough to be interesting” is “not often a successful strategy”. Instead he concludes that: “…large corporations that have successfully seized strong positions in the new markets enabled by disruptive technologies have done so by giving responsibility to commercialize the disruptive technology to an organization whose size matched the size of the targeted market” It is not, however, clear that BP and Shell would have considered this form of corporate venturing. According to a former Shell Solar executive it would not have been a good fit with either the values or the processes of Shell to allow an innovative entity to operate independently from the Group: 25

See footnote 7. Interview with former Senior Marketing Executive at Shell Solar, 7th September 2011. 27 Interview with former Senior Adviser in Gas and Power at Shell, 13th March 2012. 28 See footnote 13. 29 See footnote 5. 26

21 22 23 24

See See See See

footnote footnote footnote footnote

5. 12. 13. 12.

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“If it's a majority owned subsidiary of Shell, all the normal risks and legal obligations apply. You can try to ring-fence it. But it ends up being a ring-fence with a swinging gate…Big Shell has trouble with this.”30 As we have seen, only one major oil company has shown a willingness to try this approach. Total invested $1.3 billion in 2011 for a 60% stake in SunPower—a leading US solar manufacturer and project developer with revenues of $2.2 billion in 2010. In explaining the rationale of this strategy, Total like BP and Shell looked to the long-term: “A few years ago, we were convinced that the world needs to have all kinds of energy, because the hydrocarbons would not be able to fulfill the growth in demand. We have to push hydrocarbons as much as we can; we have to also push different types of energies” (Gelsi, 2011). Like Shell, Total already had an existing investment in a small solar company called Tenesol, but decided this was not enough: “For us it's very clear, we want to be among the top players in the world for solar. You can’t play and be in the second and third division. You need to play in the first division. You need to be in the top three. You have to be ambitious to be in this business.” (Gelsi, 2011). But unlike Shell’s acquisition of Siemens Solar, Total is not attempting to fully integrate SunPower. Rather, Total seems to be acting in line with the recommendations of Christensen (1997) by leaving it as an independent entity. Total currently has no plans to acquire the other 40% of SunPower, they have kept it listed on the US stock exchange to incentivize management, and have left the existing management team – who are specialists – in place. The experience of BP and Shell would suggest that this is the preferred strategy. But the strategy’s ultimate success will depend on the oil company, in this case Total, remaining disciplined, and leaving the solar company to operate as an independent entity, staffed by specialists, freed from the values and processes of the corporation that will otherwise stifle it.

8. Conclusion and implications For many years it seemed the oil companies – BP and Shell – would remain among the top-ranked players in the solar industry. They saw that solar would one day be a big energy market, moved early to capture the opportunity, and brought deep pockets, the management expertise, influence over public policy, and longterm visions to the challenge. But as we have seen, they ultimately failed, and were forced to exit. In explaining this paradox, theories of innovation have insight to offer. Schumpeter (1928) pointed out early on the importance of entrepreneurial involvement in meeting demand in new ways, and Utterback (1994) pointed to the reliance on industry outsiders to originate and diffuse breakthrough innovations. Christensen's (1997) work is especially pertinent as regards the failure of incumbent corporations to commercialize disruptive innovations successfully. Evidence from interviews and discussions with former executives in Shell Solar and BP Solar confirms his proposition that the values and processes of these large corporations were not in line with the need for relatively quick decision-making and a degree of risk-taking. But we have to draw on explanations beyond those offered by Christensen on disruptive innovations to account for some of the evidence presented here. Respondents strongly felt 30 Interview with former Senior Marketing Executive at Shell Solar, 7th September 2011.

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that the solar companies in question also did not benefit from having the right resources kept in place—in particular solar specialists in executive positions. Here the work of Penrose (1995) is relevant on the need to match the firm’s resources to market opportunities. However the theory of disruptive innovation continues to be in line with the evidence presented here insofar as it proposes that large incumbent organizations generally face a mismatch between their cost base and the initially slim profit margins that can be expected from a disruptive innovation, and that they struggle to allocate resources to a disruptive innovation that cannot help them grow from an already large base. This applied to BP and Shell as regards their efforts to diversify into solar, where internal conflicts over resource allocation to solar were seen as sowing the seeds for failure. There was however, one important dimension of evidence that innovation theory discussed here did not cover, and that is the pernicious effects of trying to capture reputational benefits from a disruptive innovation. What we saw was that this created a confusion of objectives, and operated to prevent the resource allocation needed to enable the solar companies to innovate in this domain. On first consideration, one might conclude that oil and solar will never mix. But in line with the recommendations of Christensen (1997) a more rounded conclusion is that this type of innovation needs to be done differently. Instead of managing solar as another division within an oil and gas company, a strategy that takes into account corporate strengths and weaknesses would be to spin off an independent organization whose size matches the size of the solar market, staff it with specialists, and give its managers scope to engage in entrepreneurial innovation. It is not clear that the prevailing values and processes would have allowed for such an approach in BP or Shell. Instead, Total is now leading this experiment, and time will tell if it will be successful. Looking ahead what are the implications of BP's and Shell’s failures in solar and their exit? The solar industry carries on relatively unscathed, and new business models continue to emerge and evolve to better serve the solar customer. But their experience does pose some interesting questions for oil companies operating in conditions of global warming. Specifically, it calls into question their role in a future where solar and other renewable energies become the dominant form of energy supply. What scope will there be for the oil companies unless they show themselves to be more adaptable than they were during their early forays into solar? References Adner, Ron, 2012. The Wide Lens: A New Strategy for Innovation. Penguin, London, England. Bergin, Tom, 17th March 2009. Shell Goes Cold on Wind, Solar, and Hydrogen Energy. Reuters. Blankenhorn, Dana, 11th March 2011. The Holy Grail of Oil Industry Investment in Renewables. Renewable Energy World. BP, 6th April 1999. BP Amoco Invests $45 Million in Solarex Stake to Create World's Biggest Solar Company. 〈www.bp.com〉. Bradford, Travis, 2006. Solar Revolution: The Economic Transformation of the Global Energy Industry. MIT Press, Cambridge, Massachusetts. Brady, Jeff, 7th March 2013. BP Bows Out of Solar. But Industry Outlook Still Sunny. NPR.org. Christensen, 1997. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business Review Press, Boston, Massachusetts, Clayton. Drucker, P., 1985. Innovation and Entrepreneurship. Butterworth-Heinmann, Oxford. Du Bois, Shelley 2012. Global 500: 1. Royal Dutch Shell. CNN Money, from July 23, 2012. Issue of Fortune Magazine. Fehrenbacher, Katie, 4th March 2010. Shell CEO Defends Pullback from Clean Power, Gigaom. Garnsey, Elizabeth, Vivian, Mohr, May 2011. Value Generation in Science and Enterprise: University–Industry Collaboration in the Case of CAMPATH-1. Working Paper. IfM, Cambridge University.

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